In the early history of this country, the federal government was supported by taxes on such items as property sold at auction, distilled spirits, refined sugar and the sale of slaves.
Due to the high costs incurred during the War of 1812, new sales taxes were imposed on silverware, gold, watches and jewelry. But, just three years after the war ended, Congress did away with all internal taxes, relying instead on only tariffs on imported goods.
Once again, a war spurred changes in taxes.
In 1862, to support the Civil War effort, Congress enacted the nation's first income tax law. Instead of being based on a flat tax rate, it was very much like today’s income taxes in that the tax rates rose as income increased.
For instance, a person earning from $600 to $10,000 per year paid tax at the rate of 3%. Those with incomes of more than $10,000 paid taxes at a higher rate. Because this source of income for the federal government was still not enough, additional taxes were imposed — sales and excise taxes and an inheritance tax.
In 1866, internal revenue collections reached their highest point in the history of the country — more than $300 million — a figure that would not be reached again until 1911.
As part of the Tax Act of 1862, the office of the Commissioner of Internal Revenue was created. The commissioner was given the power to assess, levy and collect taxes, plus the right to enforce the tax laws through the seizure of property and income and prosecution. Sounds pretty familiar, doesn’t it?
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The income tax was short-lived. In 1872, Congress eliminated the income tax, focusing once again on taxes on tobacco, distilled spirits and tariffs.
Twenty-two years later, taxes on income was once again instituted. However, in 1895, the Supreme Court ruled that the income tax was unconstitutional because it was not apportioned among the states as required by the Constitution.
This prohibition on income taxes within the Constitution was eliminated with the passage of the 16th amendment in 1913. This amendment gave Congress the authority to tax the income of both individuals and corporations.
In fiscal year 1918, annual internal revenue collections passed the one billion dollar mark for the first time. Two years later, income tax revenues increased to $5.4 billion.
Again, another war was to have a dramatic impact on tax revenues. With the advent of World War II, employment increased, along with tax collections, to $7.3 billion. In 1943, withholding tax on wages was begun, dramatically increasing the number of taxpayers to 60 million and tax revenue to $43 billion by 1945.
In 1981, Congress enacted the largest tax cut in U.S. history, approximately $750 billion over six years.
During President Bush’s term in office, several tax cuts were signed into law. The various changes were designed to save taxpayers over $1.3 trillion over 10 years. Changes in tax provisions included a gradual increase in childcare credits, removal of the so-called “marriage tax penalty,” dropping the rate for capital gains and reducing the top four tax bracket rates.
Fiscal year 1999 was the last time there was a budget surplus — $86 billion. Since that time, total revenues have doubled while spending has increased by 250%, leaving annual deficits hovering around $1 trillion. Total federal debt has increased by $16 trillion since 2000.